The State of Green Business: Corporate reporting gets integrated

The idea of melding sustainability reporting with companies’ traditional financial reporting has been kicking around for a few years, but is now starting to take root — “starting” being the operative word. As it does, it becomes another potent tool to help make sustainability mainstream inside companies and among investors.

Freestanding sustainability reports have become mainstream — more than 5,000 are published annually worldwide, according to CorporateRegister.com — but most aren’t very helpful. They contain too much information that is feel good, extraneous to evaluating a company’s sustainability impacts and risks. Moreover, most reports aren’t written with investors in mind — they are targeted at a broad range of stakeholders, many of which have a specific environmental, social or governance interest.

There are signs that standalone sustainability reporting may go the way of the rotary-dial phone. A growing movement is shaping up to push companies toward “integrated” reporting, or IR, that combines conventional financial information along with key sustainability data, all in a much more investor-friendly way. Says Harvard Business School professor Robert G. Eccles, one of the leaders of the IR movement: “Even so-called mainstream investors are increasingly recognizing that a company’s ESG performance increasingly affects its ability to create value for shareholders over the long term, and can even put its license to operate at risk.”

One of the more interesting and public exercises in IR comes from PUMA, a division of the PPR Group, a French company that also owns several luxury and lifestyle brands, including Gucci, Yves Saint Laurent and Alexander McQueen. In 2012 PUMA published an Environmental Profit and Loss, or EP&L statement, valuing the costs to the planet incurred by its operations across its supply chain. The company says the report will help it pinpoint areas to develop more sustainable materials and methods; provide an early view of emerging risks, for instance around availability of water for production and costs associated with greenhouse gas emissions; and enable the company to make better, more informed business decisions that take account of environmental impacts as well as more traditional financial and operational considerations.

The footwear company doesn’t yet have many companies following in its footsteps, but its high-profile efforts have shown how blending financial and nonfinancial metrics can strengthen decision-making.

Much of the energy for IR is coming from outside the United States. For example, 2012 was the first year that the nearly 500 companies listed on the Johannesburg Stock Exchange were required to file integrated reports — or explain why they can’t. Another stock exchange, Brazil’s BM&FBOVESPA, adopted a similar “Report or Explain” policy earlier in 2011 for listed companies. Germany, Spain and the U.K. are also considered leaders in this area. At least one U.S. stock exchange, Nasdaq OMX Group, led by its vice chairman, Meyer “Sandy” Frucher, already is beginning to push integrated reporting. In June 2012 it signed up to begin requiring more material information on ESG operations for listed companies.

Much of this is being pushed by the International Integrated Reporting Council, a global coalition of regulators, investors, companies, standards bodies, the accountancy profession and NGOs. IIRC is aggressively pushing for a globally accepted integrated reporting framework, linking arms with the World Business Council for Sustainable Development, the Global Reporting Initiative, The World Bank, Ceres, BSR, the Association of Chartered Certified Public Accountants and others. IIRC will be publishing its Draft Framework in 2013.

One challenge is that the growth and sophistication of sustainability reporting is limited, if not undermined, by the tools companies are using to produce them. According to a 2012 report published by Ernst & Young in partnership with GreenBiz.com, “those tools remain rudimentary, even primitive, compared with those used for reporting on financial measures.” When asked to name the tools used to compile their sustainability reports, most companies cited spreadsheets, centralized databases, emails and phone calls as the principal tools, with about 1 in 4 using packaged software. As integrated reporting catches on, it will push companies to use tools that help them generate higher-quality sustainability data.

Sustainability reporting is not likely to go away — companies have invested too much reputational capital in telling stories and providing detailed information, and stakeholders have come to view them as a minimum requirement of a company’s sustainability commitment. But as integrated reporting ramps up, sustainability reports will need to provide more detailed performance data relevant to broader stakeholders, insight into what is driving changes in metrics, and deeper explanations of management responses to social, resource and pollution challenges.

Says Harvard’s Eccles: “Good companies will see integrated reporting as an opportunity to communicate on and implement a sustainable strategy, which I define as one that creates value for shareholders over the long term while contributing to a sustainable society. But accomplishing this at a global scale means that integrated reporting needs to be a mandatory, not voluntary, exercise.”